Tapping the potential of insurance to maximize wealth

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By Joel Hall

Now that the new capital gains law has been passed, many Canadians — especially small business owners and registered professionals — are looking for ways to improve their tax strategies, and one way to do that is to consider the role of insurance in financial planning.

For many business owners, it’s hard to see insurance as anything more than liability protection, a sunk cost that will only be paid in the event of an accident or illness. It may seem counterintuitive to think of insurance as an investment vehicle, but it’s one of the best tools business owners and established professionals have to generate and maximize wealth.

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For companies, the inclusion rate of capital gains has risen to two-thirds from half. In light of this, strategies such as life insurance are emerging as an increasingly attractive option for preserving and transferring wealth.

Wealth advisors often encourage clients with excess assets to invest in a permanent life insurance policy. Not only do these policies provide a tax-advantaged account that grows tax-free, they also allow the money to eventually be distributed tax-free to shareholders and beneficiaries through a capital gains account.

But strategically integrating life insurance into wealth management is just the beginning. Viewing insurance as a distinct asset class is essential for business owners designing a robust financial strategy. This shift in perspective reveals insurance’s dual role as a wealth protector and financial growth enabler.

In addition to being a wealth accumulation tool, insurance also serves as an essential risk mitigation strategy for business owners. Ensuring adequate policies protect both the organization and individuals from potential threats, including serious illness and long-term disability.

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A person’s ability to work is one of their greatest assets, so if an accident or illness prevents them from working, they will need to find an alternative source of income. Long-term disability insurance is an excellent alternative income source and can be extended over several years. Alternatively, critical illness insurance, which is paid as a lump sum, is a valuable option for covering short-term illnesses and associated medical costs.

In organizations with multiple owners, a buy-sell agreement, backed by life insurance policies for the current owners, is an important tool to protect the company and its beneficiaries in the event of the death of one of the co-owners, as this document stipulates who can buy the deceased shareholder’s interest in the company.

The buy-sell agreement effectively ensures the continuity of the business while the life insurance policy ensures that funds are available to compensate the beneficiaries of the estate for the value of the business.

Finally, key person insurance is a life insurance policy that businesses can purchase on the life of an owner, executive, or other person who is of significant importance to the business. For small businesses, the key person is usually the owner or founder. This type of insurance provides a financial safety net in the event of a sudden loss of a key person that could negatively impact the business’s operations.

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Insurance remains one of the best-kept secrets for business owners looking to generate and grow their wealth, but it doesn’t have to be. Insurance policies are available to business owners of all sizes and can be a great tool for increasing wealth.

Business owners can benefit from working with a financial advisor to develop a customized approach that integrates insurance strategies into a broader wealth management strategy. A wealth advisor can work with business owners to determine a strategy that fits their organization’s needs and adapt these policies as the business evolves.

As business owners’ businesses grow and their income increases, their insurance needs will change, so a best practice is to review these policies periodically.

Joel Hall is a portfolio manager and investment advisor at Richardson Wealth.

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